Mongolia to Raise $500 Million in First Dollar Bond Sale

Mongolia is planning its first sale
of sovereign bonds, seeking some $500 million, to help companies
from the resource-rich nation located between China and Russia
raise funds from credit markets.

“We’re looking at an issuance of inaugural sovereign bonds
in order to set up a benchmark and open up a window for private
companies to go and raise money,” Vice Minister of Finance,
Ganhuyag Chuluun Hutagt, said yesterday in an interview in Ulan
Bator. The sale will “probably” take place this year, pending
parliament’s approval.

The bond sale would mark a turnaround from 2010 when
Mongolia scaled back and then dumped plans to borrow $1.2
billion abroad to survive the global economic slump. The plans
have been revived as gains in the tugrik trim returns from
rising copper and coal prices, Mongolia’s biggest exports, and
the nation faces a 10 percent budget deficit.

“There is a compelling story in Mongolia with its mining
industry,” Krishna Hegde, Asia credit strategist at Barclays
Plc, said in a phone interview from Singapore. “It would
provide much needed diversification. Asia has a small set of
issuers in the high-yield sovereign dollar bond space.”

Mongolia also wants to sell domestic currency denominated
bonds this year to “soak up extra liquidity” in the banking
sector that amounts to about 1.5 trillion tugrik ($1.2 billion),
Hutagt said, adding the sale would fight currency appreciation
pressure arising from soaring commodity exports.

The tugrik has gained by 15.4 percent against the dollar
since Jan. 1 last year and 19.2 percent versus the euro.

Tugrik Rising

The currency’s climb endangers domestic industries outside
of mining, such as cashmere production and agriculture, said
Stephen Kreppel, who was charged by the Mongolian government
this year to start a task force to help promote the nation’s
non-resource-based industries abroad.

“We need to be cautious because of the pressure on the
tugrik” due to rising foreign direct investment and revenue
from commodity exports, Hutagt said. “To find ways to mitigate
that risk the government will issue tugrik-denominated bonds
locally. Investors are also interested.”

Mongolia is trying to stop inflation from exceeding 10
percent this year as the government raises investment in
infrastructure and seeks to meet election promises of four years
ago to transfer more wealth to citizens. The budget deficit is
expected to be 10 percent this year, Hutagt said.

Inflation Forecast

Inflation may run to 20 percent by the year’s end, hurting
private business and strengthening the tugrik, according to a
Feb. 17 report by the International Monetary Fund, which lent
money to Mongolia last year. Economic growth is forecast at 10
percent this year, from 6.1 percent last year, on a rapid
increase in coal production, the IMF said, noting that one-third
of Mongolians live below the poverty line.

Oyu Tolgoi, a copper and gold mine being developed by Rio
Tinto Group with Ivanhoe Mines Ltd. and the Mongolian government,
will account for 30 percent of the country’s gross domestic
product when fully operational, according to a presentation by
the mine development company. Oyu Tolgoi will reach full
capacity in 2020, the company said in the presentation
distributed at a forum in Ulan Bator this week.

Erdenes Tavan Tolgoi, the state-run company developing half
of the nation’s biggest coal field, plans to start mining the
fuel this year and may produce about 1 million metric tons,
Lkhagva Ganbat, a company board member, said yesterday. Annual
output may reach 15 million tons in three years, he said.

Sovereign Wealth Fund

Until Mongolia adds a rail link to the Tavan Tolgoi field,
which is estimated to hold 6.4 billion tons of coal used to make
steel and burn in power stations, transportation will be done by
trucks, Ganbat said.

Output from the projects could push the Mongolian tugrik to
appreciate as much as 10-fold, a factor the country must
mitigate with a sovereign wealth fund sterilizing foreign
currency denominated commodity revenue, Hutagt said.

‘It’s not a ‘we’d like to,’ we need to” create the
sovereign wealth fund, Hutagt said. “To manage the economy, we
need to steer the economy, we need to be in control”

The finance ministry, central bank, financial regulator,
and development and innovation committee are engaged in
preparing the framework for the sovereign fund, Hutagt said,
without giving a deadline for when it will be complete. Finance
Minister Sangajav Bayartsogt said in September 2009 that such a
fund would be set up.